This post is a little different. For one thing it’s more or less a rehash of a post by Jeff Orenstein, one of Reed Smith’s regulatory enforcement types, on one of the firm’s “branded” blogs. DDL by contrast, is notoriously unbranded, since we have bloggers from different law firms.
Still, when we heard Jeff give an oral presentation recently on his top ten list of “country of origin” issues for pharmaceutical products (a lot of which is also relevant to medical devices), we thought, first, “we didn’t know that,” and second, that if we didn’t, our readers might not know it either. As we listened to the presentation and learned about all the nasty problems that could befall a manufacturer that didn’t get these complicated “country of origin” (which we’re abbreviating “COO” from now on) rules right in its product information, we couldn’t help harking back to a phrase from our (or at least Bexis’) misspent youth – COO sounds like a “nexus of the crisis, and the origin of storms.”
So we thought we’d pass along to our readers ten things that you ought to know (but may well not) about COO in the pharmaceutical context:
1. COO means different things to different federal agencies.
What the FDA requires drug labels to state about where a drug/device is manufactured isn’t going to help much with other federal agencies. Except for prescription medical products produced essentially entirely in the United States, U.S. Customs and Border Protection (which we’ll call “Customs” for short) requires COO designations (technically referred to as “markings”). For Customs purposes, a product’s COO isn’t what the FDA considers its place of manufacturer, but rather the country where all the various components (which may be a lot or a little) are “substantially transformed” into a new product. What does that mean? Basically, what comes out must have a different character and use from what went in. So, a company might do a lot to a product, but if the aspect (for drugs, it’s called the “active pharmaceutical ingredient” or “API”) that creates the product’s medical benefit wasn’t changed, then the COO for Customs purposes remains the country from which that key aspect/API was imported. Over-reliance on processing that doesn’t “substantially transform” APIs is the single most significant source of pharmaceutical COO mistakes.
There’s more, the COO for Customs purpose can differ from the COO for purposes of selling the product to the government. “Made in the USA” claims involve yet another standard. Finally, selling the product abroad can require a COO certificate based on still other standards imposed by foreign governments. This stuff is important. Mess it up, and the fines can be pretty big (although, again they vary). See below.
2. For Customs purposes the COO usually follows the source of clinical benefit/API.
The “essence” of a drug (less clear with devices) for customs purposes is its API. That ingredient may be imported in raw form, and undergo all sorts of costly processing before being suitable for human consumption, but if it still does the same thing (has the same biological effect) then all that processing doesn’t amount to a hill of beans from the Customs standpoint. For processing to cause a “substantial transformation” means that the character of the active ingredient must actually change. That’s about as much as we can say, since more detailed analysis is very fact-sensitive, and varies from product to product, so manufacturers need somebody who understands both the law and the specifics of the particular product’s manufacture.
3. The more things change, the more they change; changing suppliers often changes the COO.
Found a lower-cost supplier? One better able to ship to your location? Great, but remember to watch your COO. If your new supplier is in a different country, and is supplying your active ingredient/API, the proper COO marking for the finished product probably changed too. And God help you (or at least get legal help) if you buy the same API from multiple suppliers in different countries. In that case, the proper COO for the product could vary from week to week, or from batch to batch – with all the attendant legal consequences of getting it wrong. Customs doesn’t care about an importer’s logistics. It requires each product, in the form it is shipped to the “ultimate purchaser,” to be marked with the proper COO.
4. NAFTA has its own COO marking standard.
NAFTA – the North American Free Trade Agreement – has special COO marking rules for products originating in its member countries (United States, Canada and Mexico). The “substantial transformation” test doesn’t apply. NAFTA rules can be complex, but generally, where a product is manufactured from components originating in different countries, the COO will be a NAFTA country if all “foreign” (that is, non-NAFTA) materials used to make it have undergone processing that changed their tariff classification (another point where things can get complicated, but a change from a raw to a finished product usually does the trick). For example, if the active ingredient/API is a German raw material, but it’s processed into a finished product in Mexico, then the NAFTA COO will most likely be Mexico, assuming other applicable requirements are met.
5. Products with the wrong COOs are subject to high penalties.
Customs can penalize a manufacturer that marked its products with the wrong COO with extra duties of 10% percent of the appraised value of the finished products – not the raw material that caused the error. Customs can go back and audit products for five years. And these penalties, unlike most other Customs violations, aren’t waivable. Fessing up and filing a “prior disclosure” (that is, before getting caught) of the violation with Customs doesn’t help. The only way to avoid these big fines is to get the COO right in the first place. You only get one chance – it better be right.
6. An FDA manufacturing place of business most likely isn’t a product’s COO.
It’s rare that you hear on this blog that what the FDA wants doesn’t matter. This is one of those times. Yes, the FDA requires the “conspicuous” inclusion of the “place of business of the manufacturer, packer, or distributor.” Customs, like the honey badger, doesn’t care. What suffices for FDA purposes may or may not be the same country as the COO required by Customs. An FDA “manufacturer” is a person performing “mixing, granulating, milling, molding, lyophilizing (look it up yourself if you don’t know), tableting, encapsulating, coating, sterilizing,” or certain other things. A drug molded into tablets in the United States carries an FDA principal place of business in the US. But if the API is imported (from a non-NAFTA country), then the “substantial transformation” test applies. Tableting doesn’t usually change what the active ingredient does, so the Customs COO remains wherever the active ingredient was imported from. Make sure to keep the two separate and distinct. Use of the Customs COO in place of the FDA principal place of business might make the product “misbranded” under the FDCA. The FDA can levy fines and seize the product, too.
7. Still other COO standards come into play when a drug or device is sold to the U.S. government.
We’re not done yet. The United States government buys lots of prescription medical products, and something called the “Trade Agreements Act (‘TAA’)” requires all goods sold to the government have been made in the United States or in certain designated countries. The TAA follows Customs’ “substantial transformation” test but beware; big players such as China and India aren’t “designated.”
There’s still another distinction. The “substantial transformation” test – for government procurement purposes – only applies to supply contracts for product purchases exceeding $202,000 (strange number, but that’s the law). Under $202,000, and the procurement contract is instead subject to the Buy American Act (“BAA”). The BAA has yet a different COO standard. It gives preference to “domestic” products, which means goods both: (1) manufactured in the United States and (2) consisting of components, 50% or more (by cost) of which are also are manufactured in the United States.
8. Non-compliance with TAA/BAA in government procurement also has severe consequences.
Ever heard of the False Claims Act? A prescription medical product manufacturer/seller supplying the federal government with products falsely identified as TAA/BAA-compliant can be sued under the FCA. In addition, it can lose its contract and, if things really go south, be subject to suspension, debarment, and/or criminal penalties.
9. “Made in USA” should be handled with care.
Even if the correct COO of a product under the Customs’ tough “substantial transformation” test is the United States, be careful. Manufacturers may understandably be eager to emphasize a product’s U.S. origin on the packaging or in marketing materials. An even higher standard applies for “Made in the USA” claims (and equivalent statements). These are governed by consumer protection laws administered by the FTC, and state attorneys general. Only manufacturers of products “all or virtually all” made in the United States may legally represent those products as U.S.-made. Customs only requires a COO when the product is foreign-made under its “substantial transformation” test. The COO of a United States-origin (for Customs purposes) product can be left blank. For prescription medical products that, while substantially transformed in the United States, aren’t “all or virtually all” U.S.-made, it’s probably best to do that – leave it blank. Just as Customs doesn’t care about FDA standards, the FTC and state enforcement officers don’t care about Customs standards.
10. Exports of prescription medical products require COO statements meeting the relevant foreign trading partner’s standards.
Exports (as opposed to imports) of prescription medical products also require compliance with the COO standards of the countries to which the products are being exported. Foreign importers and customs authorities frequently demand their own “certificates of origin” − usually to establish eligibility for preferential tariffs under a particular free trade agreement with the United States. Here, exporters are at the mercy of each country’s divergent COO requirements. Each free trade agreement is different. Different standards for various categories of products have been negotiated by the signatory countries. Even if there’s no free trade agreement at all, the country of export may still impose its own COO standard for some other reason. The most common (but by no means universal) standard for many countries is that they accept COOs for the “United States” if at least 50 percent of the product’s production costs originate in the United States.
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Companies making prescription medical products are especially vulnerable to COO errors for several reasons. First, they are typically subject to all these different (FDA, Customs, NAFTA, government procurement, and export) regulatory regimes. Applicability of multiple, divergent standards greatly increases the risk of error. Second, prescription medical product (and particularly pharmaceutical) manufacturers often get their active ingredients/APIs from multiple sources in different countries, and switch suppliers of such ingredients frequently. That makes the proper COO (particularly for Customs purposes) something of a moving target. It is essential that such companies update their COO determinations constantly, to make sure that their current determinations correctly reflect supply chain changes and that labeling, packaging, and marketing materials are up to date. Third, and finally, compliance programs must be sufficiently robust to ensure the appropriate standards are applied, are applied correctly, and are updated in timely, ongoing fashion to account for supply chain changes.